Year ended 30 September 2003

“Net assets per share increased to £1.67”

Performance Analysis
Profit and Loss account
Group turnover increased by 3.1% during the year to £31.68 million (2002: £30.74 million). In constant currency the growth at our USA subsidiary, Treatt USA, increased in US Dollars by 9%, whilst R. C. Treatt’s sales growth of 3.9% was satisfactory. Earnings before interest, tax, depreciation and amortisation for the year grew by almost 6% to £2.83 million (2002: £2.68 million) and Group profit before tax, before exceptional items, was £2.09 million (2002: £2.77 million).

The fall in profitability was caused by increased overheads in two main areas. Firstly, the investment in the Enterprise Resource Planning system (ERP) has resulted in additional consultancy and other one-off costs totalling £131,000 which we have prudently charged to the profit and loss account rather than capitalised as part of the ERP project. Secondly, the Treatt USA relocation necessitated £116,000 ($185,000) of start up costs associated with the move which will not reoccur and these were also written off. There was also a general increase in the overhead base as the new facility was staffed and fully equipped, in addition to the expected increase in depreciation costs for the new facility.

Gross margins of 27.3% were achieved this year (2002: 29.5%) with the continuing weakness of the US Dollar during the year again being an important contributory factor for the fall. This was because a number of long term contracts were satisfied during the year, where the weaker Dollar had reduced the Sterling value of these contracts by approximately 10%.

The Group’s operating costs rose by 3.5% to £6.4 million (2002: £6.1 million). At Treatt USA there was an increase of £469,000 ($750,000) in costs as the impact of higher operating expenses at the new premises took effect, including the one-off costs referred to above. Total staff numbers across the Group remained level. An exceptional charge of £139,000 was incurred at R. C. Treatt during the year in relation to reorganisation costs.

The Group’s net interest payable increased during the year to £208,000 (2002: £167,000). This was due to a full year’s interest being charged on the funds drawn from the Variable Rate Demand Bonds which are used to finance the Lakeland facility, together with increased average borrowings at R. C. Treatt.

Earnings per share before exceptional items fell to 14.6 pence per share (2002: 19.7 pence). The Earnings per share after exceptional items is 13.6 pence per share (2002: 14.6 pence). Both measures have been shown in order to provide a consistent measure of performance over time.

Cashflow
The Group has seen an increase in its net borrowings during the year of £379,000 to £4.5 million. Cash inflow from operating activities was £2,263,000, which represents an increase of £1.3 million over last year, despite a material increase of almost £1 million in stock balances. However, the market conditions for orange oil are likely to see a reduction in the level of stock investment for this raw material over the coming year.

Group capital expenditure was £1.4 million (2002: £3.2 million) which, as expected, fell significantly as the investment in the relocation of Treatt USA took place last year. This year’s capital expenditure included £450k in relation to ERP, increasing the total ERP investment to just under £1 million. It is expected that in the absence of ERP and Lakeland costs, capital expenditure will return to lower levels in 2004.

In September 2003, Treatt USA signed an agreement to rent out the former site for eleven months, with the tenant placing a non-refundable deposit to potentially purchase the property in September 2004 for £293,000 ($483,000) net of transaction costs. If the sale goes through as expected this will have a materially beneficial effect on the Group’s cashflow at the end of the next financial year.

Balance Sheet
Over the year Group shareholders’ funds have risen to £17,228,000, with net assets per share increasing to £1.67 (2002: £1.65), an increase of 35% over the last five years. Sixty percent of shareholders’ funds are in the form of current assets and the Group’s land and buildings are all freehold held at historical cost.

Group Tax Charge
The Group’s current year tax charge of £558,000 represents an effective tax rate of 29% (2002: 31%). The overall tax charge of £545,000 is marginally lower than the 2002 charge of £554,000 due principally to R. C. Treatt receiving a tax refund for prior year R&D tax credits.

Pension and Healthcare Costs
During the year the decision was taken to reduce the future liabilities of the final salary pension scheme, by restricting increases in pensionable salaries to no more than inflation. This change has had the effect of reducing the FRS17 pension fund deficit by £1.6 million, with the overall deficit falling by £1.2 million to £3 million. Similarly, Treatt USA’s contribution to healthcare costs for family members will, in the future, be restricted.

Treasury Policies
The Group operates a conservative set of treasury policies to ensure no unnecessary risks are taken with the Group's assets.

No investments other than cash and other short-term deposits are currently permitted. Where appropriate these balances are held in foreign currencies, but only as part of the Group’s overall hedging activity as explained below.

The nature of Treatt’s activities is such that the Group could be affected by movements in certain exchange rates, principally between Sterling and the US Dollar. This risk manifests itself in a number of ways as follows:

Firstly the value of the foreign currency net assets of Treatt USA can fluctuate with Sterling. These are currently not hedged, as the risks are considered less than the cost of putting the hedge in place. Further, any exchange gains or losses on Treatt USA’s balance sheet do not affect real cashflows.

Secondly, with R.C. Treatt exporting to over 80 countries, fluctuations in Sterling’s value can affect both the gross margin and operating costs. Sales are principally made in four currencies in addition to Sterling, with the US Dollar being by far the most significant. Raw materials are also mainly purchased in US Dollars and so a US Dollar bank account is operated to allow Dollar denominated sales and purchases to flow through this account. If there is a mismatch in any one accounting period and the Sterling to US Dollar exchange rate changes, an exchange difference will arise. Hence it is Sterling’s relative strength against the US Dollar that is of prime importance.

As well as affecting the cash value of sales as a result of US Dollar exchange movements, this can also have a significant affect on the replacement cost of stocks, which affects future profitability and competitiveness.

The Group therefore has a policy of maintaining the majority of cash balances, including the main Group overdraft facilities, in US Dollars as this is the most cost effective means of providing a natural hedge against movements in the US Dollar/Sterling exchange rate. Currency accounts are also run for the other main currencies to which R.C. Treatt is exposed. Based on estimated future cashflows for each currency a conservative position is taken with forward contracts, if required, in order to protect the Group’s asset base. This policy will protect the Group against the worst of any short-term swings in currencies.